Obama Refi Plan: Does It Work at 5.5%?

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For most Americans, the tick up in the rate on the 30-year-fixed from just under 4 percent to around 5.5 to 5.75 percent doesn’t mean much, other than yet another bump on the road to potentially buying a home. But to the Obama administration, I have to believe the increase is a huge blow to its homeowner bailout program.

The Making Home Affordable refinance program was designed to allow borrowers with up to 5 percent negative equity to refinance into a lower-rate mortgage. “The Obama Administration’s program will provide the opportunity for up to 4 to 5 million responsible homeowners who took out loans owned or guaranteed by Fannie Mae (NYSE: fnm) and Freddie Mac (NYSE: fre) to refinance through the two institutions over time,” the press release touted on March 4, 2009.

When I interviewed HUD Secretary Shaun Donovan at the end of April, the first thing he jumped on was mortgage rates. “We’ve seen, since the plan was announced on February 18th, a dramatic drop in mortgage rates down to record lows for 30-year fixed rated financing, below 5 percent for five weeks in a row now. I think that’s incredibly important.”

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I couldn’t agree more. Refinance in April and May surged on the back of those low low rates. On May 14, the U.S. Treasury called a press conference to “Highlight Implementation Progress” on the Making Home Affordable program. It cited 233,000 eligible refinance applications through Fannie Mae with over 51,000 having LTV’s between 80 and 105 percent. 2,150 of those refinance loans closed and were delivered to Fannie.

All good, but what happens now that we’re at a higher interest rate on the 30-year fixed? I asked Treasury for an interview, but they politely declined, instead sending me the following from a Treasury Spokesperson: “Rising rates will slow refinancing, but we don’t expect them to affect mortgage modifications significantly.”

The modification program isn’t driven by the rate on the 30-year fixed, since banks are lowering interest rates much farther than that for eligible borrowers. But the refi plan, which was expected to help more borrowers than the modification plan (borrowers who are not yet behind on their monthly payments) is all predicated on those low low rates.

Guy Cecala, of Inside Mortgage Finance, says, “if rates hover around near 5.5 percent, it will be harder to generate a lot of refi business since most people already have rates around percent.” But he adds, “I think the recent rise is an aberration and that mortgage rates will drift back down to under 5 percent within the next month or so.” He bases that assumption on the fact that 90 percent of the current mortgage market is government-related (Fannie, Freddie, FHA, VA).

But Mark Hanson of the Field Check Group is less optimistic about rates. The borrowers who qualify for the refi program already had fixed rate loans. “Someone with a 60 percent LTV 2 years ago has 105 percent today. Back then that 60 percent person already got under 6 percent,” notes Hanson.

And he doesn’t see rates going back down either: “I think the Fed does something near term to try to wrestle rates back down, but I do not think they can stay meaningfully below 5 percent over time without being national subsidized at 4.5 percent.”